This article was recently published on AK71's blog, and is reproduced with permission.


dollar_signMY DAD, WHO is almost 70, recently told me that he was trying to reduce his expenses and he asked if he should still pay almost $500 every quarter for his one and only whole life insurance policy. It amounted to almost $2,000 a year as a recurring expense.

I explained to him that he has no dependents anymore and that it is OK for him to terminate the policy. He said that we would get more money from the insurance company if he should pass away while the policy was still in force.

My dad is right, of course, but I told him our family don't need the money. We are no longer dependent on him financially.

I think he might already have thought of terminating the policy but was unsure because he would have liked to leave more money for his family when he leaves this world. I persuaded him that the product had already done its job and that it had become a luxury, a "nice to have" item but not a "must have" item.

My dad terminated the policy shortly after and got back a 5 figure sum (about $50,000) as well. The payout upon death would have been under $80,000.

However, the most important thing to note is that my dad's cash flow improved by quite a bit after this. His financial burden is now lighter.

For many years now, I am a big advocate of buying insurance for the sake of insurance. Buy when there is a need. It is like buying anything on a need to have basis in life.

We might want something but we should think if there is a need for it. This is premised on the fact that money is a scarce resource for many of us. Some of us realise this while some of us don't.

Beware of marketing efforts to create an impression that something is a need for us when it could really be a want. To be fair, however, something could be a need for a person but a want for another.
 


• Sillyinvestor said...

Hi AK,

I think people thinking of terminating whole life policies really need to think thrice and consider a few things.

1) it is a different ball game from buying term and invest DIY. You are already in the game, the distribution costs usually means you lose more than you contribute unless you are already holding it for donkey years, e.g. More than 15 years.

2) you are really sure you do not want the insurance to payout when u pass on. Understand that your money, unless it is cash in joint account, is not so easily transferable at a short notice.

The funeral, the medical fees before you see god in heaven, have to be borne by your love ones first. With insurance, your agent will help you with the processing of cash related matters.

Of course, you could make good plans and need no insurance service, but make sure you have a plan.

3) if your only grouse is continuous premium payment, you can turn your policy into a paid-up policy.

 

AK71 said...

Hi Mike,

Thanks for sharing these very pertinent points. :)

1. My dad had the policy for donkey years. I think he had it since I was in high school.

2. I think we will be able to bear the expenses you mentioned in case my dad says bye-bye to this world. I really don't think my dad's insurance agent cares enough to do anything anyway.

3. This is a good idea but it would make sense if we still need the coverage. Otherwise, the lump sum payment could be very helpful.

Whew! I think my dad's case to terminate his whole life insurance policy just made the grade. ;p

Of course, I know your intention is to flesh out my blog post to make it more complete. I can always depend on you for this. Thanks again. ;)

 

• JC said ....

Since the Dad of 70 has been paying for his policy for such a long time, it would be a waste to let the policy lapse. We never know when a serious illness can strike anyone. Every body has to die one day, why give up the insurance, money is never enough! If Dad can't afford to service the payment, I would take over to pay n in the end the payout would be more than the premium paid.

AK said ....

My dad had the policy for 24 years, maybe 25. He bought it quite late in life. It is really quite an expensive policy, therefore, for the amount of coverage he gets.

As for serious illness striking us, I think that is where Critical Illness coverage comes in. I always say we need Critical Illness coverage. My dad's whole life policy doesn't do anything in this area.

As for taking over paying of the premium, I think that my dad would not want any of us to do that. It would hurt his pride and I wouldn't want to do that, for sure.

Pay the yearly premium on his behalf from now on and when he goes, I take the money? Nah.

At the end of the day, my dad took back the money he paid over the last 24 or 25 years and more. 

At least he gets to see his money when he is alive now. It is his money. I wouldn't want to take that away from him. 

Of course, I know your intention is to flesh out my blog post to make it more complete. I can always depend on you for this. Thanks again. ;)

 

• Stoical Keynes said...

Hi AK,

From the title of your post, I anticipate quite a few (esp insurance agents) to come forward and disagree with you. Oh well...

But not me. I have a similar philosophy as you with regards to whole life policies. ;p

Regards,

15 HWW

 

Hi 15HWW,

As long as the comments are constructive and civil, I welcome them. :D

Having different perspectives from people who are thoughtful and who want to share without ulterior motives will only enrich our experience. Right? :)

 

• Derek said...

HI AK,

I agree with your points and to share:

A few years ago, I cancelled my Dad's life plan that he was paying for over 20 years. He has taken a loan from his policy many years ago and he did not realize that the interest has snowballed. Thinking and 'convinced' that it would be a waste to terminate a policy after such a long time, I took it up to repay the loan.

It wasn't long before I realized that I was going to take a long time to repay the 'loan' and a good part of this sum is to pay back to the insurer the interest for borrowing my dad's own money!

The other important point is that the policy is a pure death only life plan. There was a personal accident rider but I cancelled that and bought a stand-alone accident rider. Personal Accident plans are not expensive and underwriting is not dependent on age.

Aided with the points that AK has already bought up, I cancelled the policy and channel the money into his retirement savings account which will suit his needs better.

 

AK71 said...

Hi Derek,

Very sound reasoning. :)

Your dad is lucky to have you help him manage his personal finances. 

Thank you so much for sharing your experience with us here. :) 

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